Tesla: The Most Expensive Stock in the Magnificent Seven

Tesla’s meteoric rise has positioned it as the most expensive stock among the elite group known as the Magnificent Seven, which includes Apple, Alphabet, Meta Platforms, Microsoft, Nvidia, and of course, Tesla. While the other trillion-dollar giants trade at a much more manageable average of 29 times estimated 2025 earnings, Tesla’s shares are currently trading at a staggering 130 times those same earnings. This discrepancy raises serious questions about what it will take for Tesla to justify such a lofty valuation.

A Post-Election Surge

Since the November 5 elections, Tesla stock has experienced an astonishing 73% surge, bringing its year-to-date gains to about 76%. This dramatic change has turned what was becoming a lackluster year for Tesla investors into a spectacular one. Yet, with these gains comes an undeniable risk as the company’s stock trades at a valuation that some analysts argue appears unsustainable.

Mismatch with Analysts’ Projections

As of now, Tesla shares are trading above the highest target price issued by major U.S. brokers—a situation that rarely occurs in the stock market. Daiwa analyst Jairam Nathan had previously set a target price of $420; that was quickly surpassed as Wedbush analyst Dan Ives ramped up his target price to a street-high of $515, anticipating that the incoming Trump administration would expedite policies that favor the rollout of autonomous driving technology.

What’s concerning here is that the current market valuation suggests that investors do not fully trust Wall Street’s earnings estimates for Tesla. It seems investors have greater confidence in future revenues than analysts appear to. Accordingly, many investors are banking on two key factors that could enhance earnings projections significantly.

The Dual Drivers of Future Growth

First, there’s the upcoming launch of a new Tesla model in 2025, which CEO Elon Musk anticipates will drive unit sales up to around 2.3 million vehicles—a significant increase over Wall Street’s projections. However, the primary focal point for investors right now seems to be the company’s plans to launch a self-driving robotaxi service also slated for late 2025.

While they’ve yet to see substantial earnings from this sector, Tesla is preparing to release Full Self Driving version 13.2, a new iteration of its driver-assistance software. Elon Musk is increasingly declaring that this advanced technology will soon be superior to human drivers, justifying a potential robotaxi business model that could reshape Tesla’s revenue streams.

The Robotaxi Earnings Enigma

Estimating how much revenue Tesla could generate from robotaxis feels more like guesswork than hard data, primarily because successful robotaxi businesses are still in their infancy. Alphabet’s Waymo has proven the model can work but completes only about 150,000 driverless rides per week—a far cry from the scale Tesla aims to achieve.

To put Tesla’s current trading valuation into perspective, if the company seeks to align itself with the average P/E ratio of its trillion-dollar counterparts, it would need to report annual earnings of roughly $50 billion. Expectations have Tesla’s traditional car business raking in about $10 billion over the next few years, which means the ambitious robotaxi initiative would need to deliver around $40 billion a year for Tesla’s valuation to make any sense alongside its peers.

Outlandish Valuation Expectations

But let’s consider the staggering aspirations Musk has articulated over the years. He once predicted that Tesla could surpass the combined market capitalizations of both Apple and Saudi Aramco, which today would place Tesla’s valuation at a dizzying $5.6 trillion. If we align Tesla’s potential with those two powerhouses, trading at a weighted average P/E of about 25 times estimated 2025 earnings would imply revenues of approximately $225 billion annually.

In short, while Tesla’s future appears bright according to some investors, it’s important to stress that the expectations are alarmingly high. The race towards full autonomy in driving needs a solid outcome, and how much money robotaxis will actually bring in remains anyone’s guess.

In conclusion, Tesla’s valuation stands as a testament to the extent to which investors are willing to bet on future growth, even if historical precedents and current earnings projections do not fully support such optimism. As always, potential investors must proceed with caution and realistic expectations, aligning their strategies with time-tested financial principles. In an increasingly skeptical market, one must ask—can Tesla truly deliver, or is this a bubble waiting to burst?